3rd Quarter GDP figures not so rosy in the Philippines despite a continued strong outlook

Manila, PHILIPPINES, Nov 28, 2014 – Last Thursday National Economic and Development Authority (NEDA) director-general Arsenio M. Balisacan released the latest figures for Gross Domestic Product (GDP), and a 3rd quarter slowdown in growth to 5.3% (annualized) painted a less rosy picture of the Philippines than analysts had been accustomed to over the last 24 months.

While Balisacan still hoped to achieve the full-year target of between 6.5% and 7.5% GDP growth, economists saw that as unlikely as that would require an explosive 8% to 9% annualized growth over the last quarter of the year.

The drop in growth can be attributed to two main contributing factors: a contraction in both import and export growth, due to flagging domestic demand, and a volatile global economy suffering a variety of headwinds; and a freeze on public infrastructure spending, the controversy surrounding the Disbursement Acceleration Program (DAP) being a large part of this.

Import growth contracted by 2.6% in September following a 1.3% contraction in August. Trend continues to follow consumer and business confidence, which has been persistently weak over the last quarter due to muted consumer demand and capacity issues in manufacturing. Total imports still increased by 3.4% to $48.1 billion from $46.5 billion a year ago, though, largely due to the strength of the first two quarters this year.

Balisacan expected imports to increase in the final quarter, however, due to traditionally strong demand arising out of the holiday period. Domestically, consumption is also set to grow strongly in 2015 with steadily growing remittances (8.1% more than at the same time last year) sustaining baseline demand (currently accounting for 61.5% of the basket of goods measured for CPI) for improvements in spending conditions to have a positive effect, including the rapidly declining price of crude oil and coal, factors in the cost of energy (although no more so than already embedded structural issues which stem from the fraught regulatory arrangement following the privatization of the energy industries in the Philippines – Inflation is at a six month low of 0.1% in October).

Exports, though, recorded a regional high of 15.7% growth over September, outperforming China’s 15.3%, continuing to deal with structural transition and rapidly rising wage growth, although this was still overshadowed by record June results of 21.3% growth. Exports are on track to grow by 9.9% over the full year.

However, international trade continues to be negatively affected by infrastructural challenges present in Philippine shipping ports. HSBC economist Trinh Nguyen pointed to the challenges in Manila’s shipping port specifically, as emblematic of the challenges arising out of the lack of public infrastructure spending.

From January to September this year, government expenditures amounted to P1.46 trillion ($325.09 billion), which was 16% below the target of P1.73 trillion ($385.22 billion) budgeted. The effects of the DAP controversy are likely to persist through to the end of the year, however, economists remain positive about 2015, with Budget Secretary Florencio Abad saying that the country’s 2015 budget of P2.6 trillion ($57.89 billion) had factored in the Supreme Court ruling “which will help normalize government spending next year.” Though this is tempered by the volatile bidding process that has plagued public-private partnerships (PPP), with 12.5% of projects needing to go through a bidding process twice due to discrepancies in and challenges to awarding procedures.

Economists, though are still optimistic of growth prospects in 2015 as economic fundamentals are still sound, and the effects of the DAP controversy subside. Assuming investment picks up where it left off earlier this year HSBC’s Global Research division sees “immense opportunity”, and full year growth in 2015 is likely reach the 6.5% to 7.5% target set by the Philippine government. In the medium to long term, the Philippines continues to have excellent growth prospects, with no reason not to expect a continued smooth transition into a service and consumption based knowledge economy. Cebu, in particular is receiving much of this service based growth in the form of its BPO industry.

This has fed strong demand in the housing market with latest figures from the Housing and Land Use Regulatory Board (HLURB) showing 6137 new houses added to residential stocks for the first half of 2014.

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